A Teachable Moment for Obamacare

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Last week, the Congressional Budget Office (CBO) reported that the Affordable Care Act (aka Obamacare) would likely have a significantly larger negative effect on the labor supply decisions of Americans than previously estimated. They now estimate that workers will choose to work fewer hours, to avoid losing eligibility for Obamacare subsidies; an amount that further decreases the labor force by the equivalent of 2 million full-time jobs, or 1.5-2 percent of the labor force.

In our hypersensitive political environment, partisans quickly jumped on the "news". Opponents of Obamacare used the report to call Obamacare a "war on work", another reason to repeal and replace it. Defenders of Obamacare were busy spinning how the report was actually good news; under Obamacare, people will no longer be forced to go to work, simply to get health insurance. In fact, nothing actually changed with the CBO report. Those opposed to Obamacare are just more convinced of its damaging effects, and those in favor of it are not going to be convinced otherwise by this report.

Nonetheless, the CBO report might be a useful teachable moment; an instance where an economic effect which is usually hidden from sight, becomes visible to everyone in a way which improves our understanding. Generally, neither side is disputing the CBO report. Both sides agree with the finding that the manner in which subsidies are designed in Obamacare will give rise to the negative incentive effects that CBO estimates.

A two million jobs shrinkage of the labor force is not a phenomenon new with Obamacare. That welfare subsidies distort work choices is one of the oldest and thorniest problems facing the well-intentioned policy maker. What we know, and what the CBO report highlights, is that a poorly designed social welfare program can create a welfare "trap", ultimately causing long term harm to the very people the program is trying to help.

The same problem exists with respect to other anti-poverty programs. The Economist magazine in September 7, 2013, reported on how complex our various poverty programs have become in their effect on the decision to work or not. In yet another CBO report, a single mom in Pennsylvania, receiving aid from anti-poverty programs, faces penalties for earning more money of up to 95 percent of earnings lost to reduced benefits or higher taxes. (That's right! 95 percent) Effective marginal tax rates that are arguably immoral when imposed on the rich are routinely imposed on struggling Americans who try to work themselves off welfare.

The solution to the trap of poorly designed social welfare programs is not easy, but it is known. The basic approach is to gradually reduce benefits, so that the combined marginal effect of the reduction in benefits and taxes on earnings is not so disheartening to the struggling potential worker. But, if the level of benefits is high, and the rate of reduction is gradual, we end up with middle class workers getting anti-poverty welfare benefits. Or, we have the unacceptable situation that CBO has highlighted. People are trapped into making bad long-term decisions, so as not to lose welfare benefits.

Here is where the teachable moment can be helpful to us all. Suppose we were to design an anti-poverty program without such a welfare trap. What would it look like?

Here, in four essential steps, is how we could rid ourselves of this social blight on work and dignity, and free up struggling Americans to make decisions that work for us all.

First, we must insist on bipartisan commitment to vigorously reform the current system. According to the same Economist article cited earlier, there are 126 separate federal anti-poverty programs. The result is a complex, overlapping maze, resulting in inefficiency and waste. There is plenty of room for bipartisan agreement here, not the least of which is an agreement to a much, much simpler approach to federal level social welfare.

Second, introduce a Basic Income Guarantee (BIG), payable to everyone over the age of 18, regardless of income or work status. Since everyone gets BIG, there is no reduction in benefits necessary. The concept of BIG has been embraced by people from a very wide spectrum of political philosophies. It is a foundation on which to build a much simpler social safety net. The amount of the BIG benefit will be a matter for political debate, and will probably go through some adjustments, but the concept of BIG as a safety net is one we can all agree to.

Third, provide everyone with not just a basic income, but also a catastrophic health insurance coverage (CHIC). CHIC would provide insurance for medical bills exceeding a very high threshold, such as 50 percent of the average income by state. A nationwide catastrophic insurance program makes it a lot less expensive for employers or individuals to buy the supplemental health insurance they still may want. CHIC provides a foundational health insurance safety net for everyone, regardless of income or work status, on which supplemental health insurance (such as Obamacare II??) could be layered.

Fourth, introduce a national sales tax to fully pay for BIG and CHIC (and only BIG and CHIC). To protect low-income people, the national sales tax should exclude food and rent, but otherwise it should be broad and uncomplicated. It is essential that the sales tax completely pay for the cost of BIG and CHIC, to instill fiscal discipline into the overall anti-poverty design. By having the sales tax fully cover the cost of the safety net, people will be able to judge how much of a safety net they want.

BIG, when implemented, also opens a path to fix the solvency problems of Social Security. Social Security benefits would be layered on top of BIG, which could allow for lower payroll taxes. Lower payroll taxes would be helpful in creating more jobs.

These steps would result in a federal level social safety net that does not trap people to make choices that destroy dignity today, and their opportunity for tomorrow.